MoneyWeek roundup: Why the Autumn Statement is bad for the pound

The big event of this week was clearly the chancellor’s Autumn Statement. Yesterday, John Stepek took a look at the wider implications.

He notes that George Osborne took the opportunity “to stand up and rub his opponents’ faces in the fact that the UK economy seems to be rebounding”, but John thinks that the two men who deserve most credit are Sir Mervyn King and Mark Carney. What’s more, yesterday demonstrates that the Bank of England will still have to continue to do the “heavy lifting”.

While there were a few gimmicks, Osborne seems to have concluded that, “the most politically sensible” thing for him to do was “to sit on his hands”. With signs of recovery, “however artificially induced”, he “doesn’t need to be seen to be desperately doing something”. In any case, “why launch any big giveaways now, when there’s everything to play for next year?”

Of course, “as anyone who reads the figures knows, government spending is continuing to increase”. Indeed, “the over-spending won’t stop until the 2018/19 financial year”. At the same time, “The government has also discovered a handy new bottomless pit of imaginary money”, through cracking down on tax evasion. However, the big boost to public finances is expected to come from growth, through “a stronger economy, and thus a bigger tax take”.

Of course, “a lot of the heavy lifting in this recovery is still being turned over to the Bank of England”. Even with the decision to exclude mortgage loans from the new Funding for Lending scheme “there’s still plenty of support for the property market, so no harm done”. The big downside is that this recovery depends on “consumers saving less, and becoming more indebted”. Whilst this is happening, “most are still bloated with the last batch they took out”.

As a result, the Bank of England faces “a tricky problem”. It has promised to “revisit the case for raising interest rates if unemployment falls to 7%”. But this is likely to take place the spring. Of course, “If interest rates go up, you can kiss goodbye to the recovery”. As a result, “rates won’t go up – certainly not this side of the election”.

That suggests that, “the pound is an accident waiting to happen”, and “at some point, it will become clear to the market” that Carney” has “no intention” of raising rates”. As a result, “it’s a good idea to get overseas exposure in your portfolio”. It also suggests, “that there’s likely to be some room left in this cyclical recovery in the UK”. This week, Phil Oakley has tipped one stock that could do well out of any continuing reflation of the housing market.

Why the Autumn Statement is good for ETFs

Thanks to the Autumn Atatement, from April, no exchange-traded fund (ETF) will have to pay stamp duty on share purchases. Currently, this is only true for ETFs that are domiciled outside the UK. This change gives ETFs “a significant cost advantage over other forms of investment fund, such as your traditional unit trust”. This may lead to “cuts in charges for some ETFs – which is good news, given that they’re pretty cheap already”.

Of course, “if you do decide to buy an ETF, it’s best to invest in a ‘physical’ ETF that actually owns the underlying shares in the fund or the underlying bonds or commodities”. It’s true that “synthetic” ETFs, which use derivatives to replicate an index, “often manage to track an index more accurately than a physical fund”. However, the downside is that “with a synthetic ETF, you are exposed to counterparty risk”. This means that there is a small danger that the party providing the derivative could go bust. Even though they are underpinned by collateral, this could fall in value during a market panic.

HS2 is the new Olympics

Last year, our editor-in-chief, Merryn Somerset Webb, argued that that the Olympics “had come in massively over budget”, and “there was no way of knowing if it had delivered much in the way of economic benefits”. This was an extremely controversial position, especially after the games, and prompted her to write several articles defending her views. Nonetheless, she still thinks she was right.

Indeed, Merryn points out that the original plans in 2003 made the assumption that asset sales would limit the taxpayer’s contribution to £1.3bn. However, in the end, “the total cost to the taxpayer was ten times that first suggested”. At the same time, government attempts to demonstrate the wider economic benefits of the games have been labelled an “embarrassment”.

Of course, “the UK isn’t alone in not being able to get large projects done in the way they say they are going to”. However, this has important lessons for another big project, High Speed Rail 2 (HS2). After all, “if there is one other type of project that pretty much always costs more and delivers less than promised, it is rail”.

One expert on this area is Professor Bent Flyvbjerg, who has written a book on this area called Megaprojects and Risk. Flyvbjerg argues that, “megaproject development is currently a field where little can be trusted. Indeed, “project promoters often avoid and violate established practices of good governance, transparency and participation in political and administrative decision making”. As Merryn says, “this sounds familiar”.

Unsurprisingly, this has generated a large reaction from users. ‘Boris McDonut’ thinks that, “if I am going for my annual sojourn in Italy and guess it will cost £4,000 but find in September it really cost £5,500 who is the loser? Not the World economy, not the Italian economy and not me”. In contrast, ‘GFL’ thinks that while “the conventional wisdom is all spending is good and stimulates the economy”, such a view allows governments to spend “willy-nilly”.

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The Co-op’s auditors deserve to be blamed

Another controversial topic is the Co-op Bank. While the bondholders have “voted overwhelmingly” to restructure the company’s debt, Bengt Saelensminde still thinks that, “the episode leaves a sour taste”. He therefore turns his attention to the auditors, KPMG. He notes that the recent Treasury Select Committee hearings have confirmed “the astonishingly cosy relationship between the auditor and its client”. This debacle demonstrates that “you should be aware of what an auditor will and will not do for you”.

Of course “accurate accounts are absolutely imperative”. Sadly, the reality is that, “at the end of the day, accounts are a very subjective thing”. After all, the whole thing “comes down to some assumptions about the future value of the company’s assets”. For instance in the case of the pawnbroker Albemarle and Bond (which Bengt covers in another article) it turns out that the value of their assets is mostly based on intangibles like goodwill, which are “likely to be written down”.

It’s important to realise that, “the Co-op Bank’s problems came to light after Moody’s downgraded its bonds early in the summer”. The ratings agency suggested that, “Co-op’s loan book wasn’t as clean as it had reported, and they saw significant losses down the line”. Moody’s also had concerns about the lack of capital at the bank. All this raises an obvious question: “If Moody’s saw this coming, then why on earth didn’t the auditor?”

Even worse, it turns out that KPMG didn’t understand their role, focusing on getting the board to re-write the preamble to the accounts. Instead, they should have been making sure that the actual accounts, and the assumptions contained within them, were “true and fair”. After all, an auditor’s job is “to police the felon, not help him”. Of course, “there has to be an element of goodwill and co-operation between the auditor and the company itself.” But this should not excuse “lax auditing”.

Take advantage of the antibiotic backlash

Tom Bulford, who writes the Red Hot Biotech Alert, looks at the growing concern “about the growing resistance of bacteria to many of our most vital drugs”. Already, “the failure of antibiotics is already taking a huge human toll”, with a recent report suggesting that, “resistant bugs are killing 25,000 people every year in Europe, and a further 23,000 in the USA”.

The big culprit is the farming industry. “For decades now, there has been growing evidence that the rise of superbugs can be linked to the overuse of antibiotics for livestock”. Despite the danger of resistance, “antibiotics are routinely given to farm animals, with low doses mixed into their food and water”. The World Health Organisation thinks that consequent problem of resistance “is a looming catastrophe”.

Last year, the America’s Food & Drug Administration finally published a voluntary code of conduct, promising to “take tougher action if necessary”. The EU has also made all antimicrobials (including antibiotics) prescription only. In the UK, there are demands that “the government make it illegal to feed antibiotics to healthy animals”. Even in China, “food quality is a major cause of public concern”. In any case, “consumers are starting to vote with their feet” with US consumers “sales of antibiotic free meat are rising at 10%-15% per year”.

Tom thinks that this is “very supportive” for natural feed companies. One such firm, which he previously tipped, has now shot up in price. However, despite expanding its facilities and buying other companies, it “still has cash on the balance sheet and no debt”. Find out more about the Red Hot Biotech Alert here.

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Have a great weekend!

The MoneyWeek team
Merryn Somerset Webb
John Stepek
Matthew Partridge
Ed Bowsher
David Stevenson

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